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# BUSINESS STRATEGY AND ENTERPRISE MODELLING COURSE

(MM 5012)

2006 - 2016

By:

## ERIZA AMIR CHAN

NIM : 29113084
(Young Executive 49 Class)

INSTITUT TEKNOLOGI BANDUNG
2014

I.

INTRODUCTION
PT KS had simulating financial performances for period of 2006 2016 with all projected
assumptions applied in the simulations. In this case, we will discuss about the EVA and
Market Value of PT KS if the simulations are realized.

II.

A. DESCRIPTION
Economic Value Added (EVA) is an estimate of a firm's economic profit being the
value created in excess of therequired return of the company's investors
(being shareholders and debt holders). Quite simply, EVA is the profit earned by the
firm less the cost of financing the firm's capital. The idea is that value is created
when the return on the firm's economic capital employed is greater than the cost of
that capital.
EVA measures the difference, in monetary terms, between the return on a
companys capital and the cost of capital. EVA helps managers to better understand
financial goals, and in so doing, it helps them achieve these goals. EVA is not a
strategy and should never be thought of as a substitute for one. What EVA can do is
put the proper incentives and monitoring systems in place to increase the chances
that managers will run the firm in a manner consistent with the creation of
shareholder value.
B. CALCULATION
EVA is calculated as NOPAT Capital Charges or (RONA WACC) X Invested Capital
where:
- NOPAT = Net Operating Profit After Tax
- Capital Charges = Invested Capital x Cost of Capital.
- RONA = NOPAT / Net Assets
- WACC = Weighted Average Cost of Capital, equals the sum of the cost of each
component of capital-short term debt, long term debt, and shareholders equityweighted for its relative proportion, at market value, in the companys capital
structure
- Invested Capital is the sum of shareholders equity, all interest bearing debt, both
short term and long term, and other long term liabilities.

## EVA calculation of PT KS in 2006 - 2016

YEARS

PARAMETERS
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

NOPAT

(201,519)

60,577

863,626

1,255,075

1,264,258

1,538,957

2,148,929

2,742,032

3,758,020

4,375,100

5,208,040

CAPITAL CHARGES
EVA =
NOPAT CAP CHARGES

1,213,382

1,097,880

877,557

997,388

822,457

845,268

1,018,942

1,141,456

1,557,059

1,754,436

1,969,880

(1,414,901)

(1,037,302)

(13,932)

257,686

441,801

693,688

1,129,987

1,600,575

2,200,961

2,620,664

3,238,159

RONA

-2.64%

0.88%

15.38%

19.50%

23.62%

27.75%

31.87%

36.00%

35.86%

36.73%

38.60%

WACC
(ROIC - WACC)

15.88%

15.88%

15.63%

15.50%

15.37%

15.24%

15.11%

14.98%

14.86%

14.73%

14.60%

-18.52%

-15.01%

-0.25%

4.00%

8.26%

12.51%

16.76%

21.01%

21.00%

22.00%

24.00%

## INVESTED CAPITAL (IC)

7,640,106

6,912,843

5,616,227

6,435,920

5,351,390

5,546,064

6,742,291

7,617,568

10,480,767

11,912,110

13,492,330

(1,414,901)

(1,037,302)

(13,932)

257,686

441,801

693,688

1,129,987

1,600,575

2,200,961

2,620,664

3,238,159

Based on those calculations in the table above, we know that both formulations of
EVA can be used to make the same result.

III.

A. DESCRIPTION
Market Value Added = present value of future EVAs
Future EVAs come from two sources: a continuation of the performance levels
When companies make investments or adopt strategies that are expected to deliver
a more valuable stream of future EVAs than before, the effect is a simultaneous
increase in MVA and excess return. It is appropriate to say that in choosing one
strategy over another, we choose the one that is expected to deliver the higher
current MVA. As long as the maximization of MVA is expressed as a goal for a
proposed investment or strategy made at a point in time, and not a goal over a
period of time, it is entirely equivalent to the maximization of excess return.
If all positive EVAs are treated as distributions (reductions) of invested capital, and
all negative EVAs as contributions (additions) to capital, MVA at the end of the
observation period will equal excess return.

## B. MVA CALCULATION of PT KS in 2006 2016 each year

YEARS

PARAMETERS
2006

2007

EVA
DISCOUNTED RATE
(=WACC)

(1,414,901)

(1,037,302)

15.88%

PV OF EVA = MVA

1,357,465

2008

2009

2010

2011

2012

2013

2014

2015

2016

(13,932)

257,686

441,801

693,688

1,129,987

1,600,575

2,200,961

2,620,664

3,238,159

15.88%

15.63%

15.50%

15.37%

15.24%

15.11%

14.98%

14.86%

14.73%

14.60%

2,987,955

4,564,758

5,324,123

5,922,118

6,418,403

6,727,040

6,632,933

6,039,973

4,744,368

2,825,619

Based on the table above, we know that at the end of 2006, PT KS has negative EVA but
still has positive MVA because in the next year, EVA is projected will be increase so the
NPV of EVA in periode 2006 2016 is Rp 1,357,465 million and similarly for the next
year.
Comparison of EVA and MVA of PT KS in 2006 2016 periods shown:

8,000,000
6,000,000

EVA

4,000,000

MVA

2,000,000
EVA

(2,000,000)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

From the chart, we know that the highest MVA will be achieved in 2012 as long as all the
assumptions are realized.
IV.

## MARKET VALUE (MA)

A. DESCRIPTION
Market Value = MVA + Invested Capital
Market Value of a company is the highest estimated price that a buyer would pay
and a seller would accept in an open and competitive market.
Market Value depends on capital market perceptions of a companys ability to
deliver cashflows to its capital providers, with expected future cashflows discounted
at a rate of interest that reflects what investors would expect to get if they put their
money in companies of similar risk.

B. MA CALCULATION OF PT KS
YEARS

EVA
INVESTED
CAPITAL
MARKET
MARKET
VALUE

2006

2007

2008

2009

2010

2011

(1,414,901)

(1,037,302)

(13,932)

257,686

441,801

7,640,106

6,912,843

5,616,227

6,435,920

1,357,465

2,987,955

4,564,758

8,997,571

9,900,798

10,180,985

2012

2013

2014

2015

2016

693,688

1,129,987

1,600,575

2,200,961

2,620,664

3,238,159

5,351,390

5,546,064

6,742,291

7,617,568

10,480,767

11,912,110

13,492,330

5,324,123

5,922,118

6,418,403

6,727,040

6,632,933

6,039,973

4,744,368

2,825,619

11,760,043

11,273,508

11,964,467

13,469,331

14,250,501

16,520,740

16,656,477

16,317,949

## MA performance of PT KS in 2006 2016 periods as follows:

18,000,000
16,000,000
14,000,000
12,000,000
VALUE

PARAMETERS

10,000,000
EVA

8,000,000

INVESTED CAPITAL

6,000,000

MARKET VALUE

4,000,000

2,000,000
(2,000,000)
YEAR

Based on the chart we know that the highest Market Value of PT KS is in 2015 with price
Rp 16.656.477 million. In 2016, MV of PT KS decreases because MVA also decrease.
MVA in 2016 decrease because at the time, there is no future value of EVAs according to
the projection time period that end in 2016.

C. CONCLUSIONS
Companies need performance measurement systems that senior managers can use to
ensure that the company is on track in delivering value to its shareholders.
One of EVAs great strengths is that it provides a link between performance
measurement and capital market valuation, helping to ensure that managerial
performance is evaluated and rewarded in a manner that is consistent with sound
corporate finance theory.
Based on those formulas, we can see that EVA increases and value is created, whenever
a company can achieve any of the following:
1. Increased returns on existing capital. If RONA increases while holding WACC and
Invested Capital constant, EVA increases.
2. Profitable growth. When an investment is expected to earn returns greater than the
WACC, value is created. Even if a growth strategy is expected to reduce RONA, value
is created as long as the incremental RONA exceeds the WACC.
3. Divestment of value-destroying activities. Invested Capital decreases when a
business or division is sold or closed down. If the reduction in capital is more than
compensated for by the improvement in the spread between RONA and WACC, EVA
increases.
4. Longer periods over which it is expected to earn a RONA greater than WACC.
5. Reductions in the cost of capital.